Chapter 6 Activity Based Costing

- First coined by Robert Kaplan and William Burns in the 1980s

- Focused on manufacturing industry
- Changed the manufacturing process as it reduce the incurrence of
DM Cost but increased the depreciation related to machineries
which is an Indirect Cost
- Cost Accountants allocate OH cost on individual products in an
arbitrary basis
*Arbitrary Basis - based on the most related cost drivers that Activity Centers - the source of accumulations of cost
produces the particular OH Cost
- The traditional ways of allocating FOH becomes more inaccurate
since OH costs are not cost equally by all products.
- Nakakatulong ang ABC sa production na maraming processes and
machineries. It identifies the true cost and true profitability of
individual products and services.

ABC
- Allocate costs based on activities

Terminologies
1. Activity - any event, action, transaction, or work sequence that
incurs costs when producing a product
2. Activity Cost Pool - set costs attributed to a distinct type of
activity
3. Cost Drivers - any factors or activities that have direct cause and
effect relationship with resources consumed Comparison of Plant-Wide, Multiple Departmental and ABC
4. Cost Objects - are responsibility centers, products, or services to Costing
which costs are assigned 1. Plant-wide - single FOH for all products produced regardless of
5. Activity Rate - the budgeted activity cost divided by total activity the activities.
base usage

2. Multiple Departmental - different departments has their own

FOH rate and dependent on the number of departments
- pag napunta si product sa ibang department, ma-aapply sa kanya
yung FOH nung specific department na yon

Cost Hierarchy - there is a classification of activities and cost

drivers
1. Unit-level Activities - activities made EVERYTIME a service or
product is made
- most basic/smallest activity
- ex: assembling in the production department 3. Activity Based Overhead Rate - has several departments that has
2. Batch-level Activities - activities that occurs due to the different activities. The activities accumulates costs that is part of
production of a batch order the FOH.
3. Product-line Activities - activities that occur to support an entire
product line but not always performed every time a new unit or
batch of product is produced
4. Facility-level Activities - activities carried out at the plant level,
independent of the number of units produced
- is not affected by the production capacity, maiincur pa rin may
production man o wala, for example building depreciation